Last weekend we spent some time answering questions on the stock market forum ‘Hot Copper’.
We ran out of time, so took some questions offline, with a promise to follow up.
We’re pleased to present that follow up Q&A as follows:
Q1. You mentioned in a past communication that the India project is designed around a “fail fast, fail cheap” methodology. You also alluded to various technical hurdles that you hope to overcome with regard to the scale-up of Matmor, are you able to disclose some of the key risks the company has identified with respect to the up-scale of Matmor from pilot scale to commercial?
To be clear, this approach is not limited to the India project. This approach guides the research, development and commercialisation process from beginning to end.
All commercialisation programs should be designed to fail as quickly and cheaply as possible. When this approach is ignored it can result in failures such as the Port Hedland hot briquetted iron (HBI) plant, which while successful at small scale, jumped by too large a scale factor too quickly, failing at a reported cost of $2.4Bn.
The essence of R&D is the exploration of the unknown via the implementation of the scientific method, risk mitigation strategies and innovation.
In fact, to be eligible for the AusIndustry R&D Tax Incentive, the outcome of the activity cannot be known.
Unknown, unknowns are therefore the greatest risk to the commercialisation of new processes.
The commercialisation of an industrial process to large scale may also include scalability risk.
This is particularly the case for non-linear or non-Newtonian processes such as Coldry and Matmor.
By employing the scientific method and adopting incremental, stepwise scale-up factors, the risk is appropriately mitigated.
At a high level, there are two distinct streams of research in relation to Matmor:
- Chemical processes; The experimental investigation of the underlying process chemistry to ascertain how and why the reduction of metal oxides occurs at a relatively low temperature, over a relatively short duration.
- Apparatus; The progressive, incremental scale-up of the apparatus required to achieve process conditions.
These two research streams are interactive and multivariate and cannot simply be extrapolated based on current industry knowledge. Errors in the understanding of the chemistry will propagate as errors in the design and function of the apparatus, and vice versa, resulting in flawed or failed outcomes if extrapolated in a linear manner.
The India Project is designed to validate or refine key variables through the scale-up process, including:
- Furnace design: there’s no prior technical precedent to our innovative furnace design.
- Thermal and Physical properties: heating profile, product flow rate, energy mass balance.
- Reaction kinetics: The impact of material and process variables on the chemical reactions.
- Non-linearity: The process and plant are multivariate, non-linear, complex coupled systems which preclude extrapolation beyond certain scale factors.
Q2. In light of question 1, how soon will ECT become aware that Matmor is not able to scale (fail) and why? Will this be months, years, decades of operation of the India pilot plant?
Answering this very question is the primary objective of the India project and the commercialisation pathway in general.
Data is required to assess process performance against engineering, design and production objectives at each scale.
De-risking is anticipated to occur progressively along the R&D Phase of the India project timeline (currently up to 3 years). Any issues identified will be targeted for solutions during that period. The R&D phase may need to be varied such that a full and final assessment of Matmor’s performance can be achieved before the commencement of the commercial phase.
The project plan currently allows 9-12 months construction, 6 months commissioning and where needed, up to 18 months of experimental activity to generate sufficient data to consider the feasibility of commercial roll-out.
In the leadup to running the plant as a whole (including the Coldry component), individual plant components will undergo dry and then wet commissioning, identifying potential performance or design issues in those areas, on the way through, providing an opportunity to asses and respond.
The Company fully expects there to be refinements and adjustments to the plant but cannot predict what they may be or how long they may take to implement until there is actual data to inform such assessments.
A project timeline, including engineering, procurement, construction, commissioning and test program will be released following financial close.
Q3. To counter my Q2, how soon will ECT become aware that Matmor and Coldry are performing as expected and it’s all “green” lights for commercial scale-up? Will this be months, years, decades of operation of the India pilot plant?
As outlined in Q2.
Q4. One can see the effort management is making to answer shareholders concerns and questions of late. Thank you for this effort and please understand that as a shareholder my primary concern is that we extract full and future value from the share price. It is evident that you as management are aware the market is not seeing the full potential future value of the company. Why do you think this is? (Here is your chance to take ownership of the current share price).
In delivering long-term shareholder value, the Company has been very clear in its objectives; the commercialisation of Coldry and Matmor, providing guidance on progress on the way through.
ECT is a pre-revenue technology commercialisation company. As such it may be worth taking a moment to draw your attention to the fundamentals of commercialisation as we see them and how we believe methodical execution, risk mitigation and frugal innovation can combine to bring our technologies to market, resulting in a commensurate valuation of the Company.
Coldry is poised to advance to demonstration scale. Matmor is poised to progress to pilot scale. As an integrated technology, this is the critical next stage ahead of the subsequent proposed commercial-scale demonstration.
Demonstration at appropriate scale is the key techno-economic validation stage in the commercialisation pathway prior to commercial deployment.
Commercial deployment is the key to generating revenue from the Coldry and Matmor technologies.
Revenue (both present and future) is the key to establishing a basis for fundamental valuation of the business and delivering on long-term shareholder value.
In this way, the implementation of the India project is analogous to the journey followed by a ‘typical’ junior explorer. The potential risk in seeking out new mineral deposits is typically high, as is the potential reward. This attracts Junior resource companies to the process of testing, evaluation and securing of a potential resource. The risk of discovering and proving this resource is borne by shareholders who have a commensurate risk-reward appetite. Following validation of the resource the junior explorer typically either on-sells the project to an established player or enters a JV with a partner who has the capital to develop the project, usually at a premium for existing shareholders.
ECT will continue to advance its commercialisation program and communicate the progress and results. Not all commercialisation will follow the path laid down in India. Whilst there is significant expected value in the technology assets developed to date, prior to commercialisation and the actualisation of potential revenue, the risk of share price volatility will remain, compared to that of a company with a mature market and revenue stream.
Shareholders will have likely researched the general market potential, understanding that India alone is planning on increasing its steelmaking capacity from 100 million to 300 million tonnes per annum by 2030.
India has little in the way of domestic coking coal and its iron ore is relatively soft, producing considerable fines.
Following successful R&D outcomes, our India project will deliver a solution that decouples reliance on coking coal and liberates ‘stranded’ iron ore fines, enabling the use of lower cost domestic resources. For each tonne capacity developed through the implementation of the integrated Coldry-Matmor technology, the Company expects to earn direct revenues from royalties, together with the prospects of diversified income streams related to project management and other related activities.
Q5. Why are we not seeing senior management or board members buying stock on market at current levels? This would help instil some confidence that management see the company as a “good bet”. Why has there been no activity on this front?
Past and present Key Management Personnel (KMP) and Directors hold over 620 million shares representing almost 13% of the Company.
The Company’s Security Trading Policy and Corporate Governance Statement are available on its Website – http://www.ectltd.com.au/about-us/corporate-governance/.
KMP are only able to trade in the Company’s securities during two 8-week windows following the release of the interim and annual reports.
During those windows, permission is only granted if the KMP is not in possession of inside information.
Further, the Corporate Governance Council, under Principle 2.4 recommend that the majority of Directors be independent. At present, the majority of the Board is independent. Independent Directors do not hold shares.
Q6. Please provide comment to the other posters who have raised the Arrowhead research report from a few years ago as being outdated and the chance of updated coverage. Please see their individual posts for further clarification and I look forward to your response.
ABID provide their view via proprietary valuation methodology based on the publicly available information. The Company will provide an update to ABID following financial close.
Q7. Does management think there is a local story worth marketing with respect to sales of local Coldry? In a few days, more details will be revealed with respect to local sales and revenue so this is your chance to let us as shareholders know if you think local sales represents a good story which can be used to market Coldry to other potential customers (local). At this stage, we as shareholders are being kept in the dark with respect to local revenues and customers, but don’t you think a public story regarding the “actual” benefits customers are receiving right now is a worthy story to be told?
The Company is preparing an update on local market business development activity.
The local market story is compelling, however, there is a range of factors that must be taken into consideration and balanced with regard to timing and approach.
As previously mentioned, the Company has taken an approach that seeks to balance the primary purpose of the Coldry pilot plant, being R&D, and the pursuit of local market sales.
Balancing the transition from R&D activity, with a variable production profile, to commercially-focused production with a maximised production profile, is essential to ensuring pilot plant availability in support of the India project in the short term while ramping up to maximum commercial capacity in the medium term, ahead of the potential transition to the proposed Latrobe Valley project, should we decide to proceed.
In addition, the proposed Latrobe Valley project feasibility study seeks to build upon local market interest.
The company is in the process of finalising an update to the market on local Coldry sales and more information will be disclosed in this release.
Revenue will be reported twice a year via the interim and annual reports.
Q8. Last one as I want to leave the lectern for others. Building the “India” relationship with NMDC, NLC over the past few years has obviously presented challenges, I applaud your patience because if we get this deal over the line then it is testament to your patience over the years to get it to this point. What have/were some of the biggest challenges the company faced with doing business in an accustomed “Indian” way? By that I mean, we do business in Australia a different way to those in India, are you able to provide a few examples or make comment on how hard it has actually been and why? I am interested to know just how differently things are done.
We understand that shareholders would like to know a bit more about the types of challenges in doing business in India.
India is an emerging nation and the world’s largest democracy.
As previously mentioned the approach to doing business in India involves ‘patience with a polite persistence’. As such it would hardly be polite to itemise the challenges faced, as harping on such challenges or hurdles may be viewed by our partners as unnecessary criticism, which is not conducive or compatible with the basis for our long-term relationship.
We refer shareholders to the many case studies available on the Internet that detail the challenges experienced by foreign countries when engaging in the Indian market.
We’ve mentioned previously that the Australian high commission has praised ECT for its approach to doing business in India. This praise is echoed by personnel within Austrade. We plan to develop a case study with Austrade for future publication.
Any international jurisdiction will have its challenges simply by the mere fact that business culture and operating norms may be vastly different. ECT will provide further communications to our shareholders about the opportunities for global expansion of the Coldry and Matmor technologies, and the broad strategy through which we see these opportunities coming to fruition. It is certainly clear that our experience in India has prepared the business very well for this next phase.